CRISES OF TURKISH ECONOMY
Sena Ekin Coşkun İlayda Gümüş Yiğit Onay Bektaş Torun Ayşe Sera Yağlı 14/04/2011
Content • • • • • • •
Introduction 1929‐31 : Great Depression and Turkey 1958‐61 : FX Crisis 1977‐80 : FX & Debt Crisis 1994 : Currency Crisis 2001 : Banking & Liquidity Crisis Conclusion
Introduction
Gülten Kazgan: Türkiye’deki Ekonomik Krizler
The Great Depression and Turkey 1929‐ 1930s
29 Oct. 1929 “New York Stock Market Crash”
Pre- Crisis (1920’s) • Similar to late Ottoman economy - Concentrated on commercial agriculture and trade -Pre-mature industrialization: food and textile - Limited technology and work-force concentration • Considerably open economy (similar to 1980’s) •What increased the impact of depression? -Due date of first installment of Ottoman debt - Interest paid to railway construction
Crisis (1929-1932) • The effects of crisis in developing countries •In Turkey? - Crisis in Countryside & Effects on Agriculture -Crisis in Urban Settings
• Policies and measures taken
Crisis (1929‐1932) • The
effects of crisis in developing countries
•In Turkey? - Crisis in Countryside & Effects on Agriculture -Crisis in Urban Settings
• Policies and measures taken
After Crisis (1930’s) • Effects of governmental policies •Recovery period • Shift in the economic structure ‐In the world? ‐In Turkey?
After Crisis (1930’s) • Effects
of governmental policies
•Recovery period • Shift in the economic structure -In the world? -In Turkey?
1958 Crisis / Pre‐crisis ●
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1950: DP government – growth was fast until 1954 1950-1953: Shift towards Free Market Economy 1953: Korean War ended, price of agricultural products in global markets decreased As a result, terms of trade deteriorated for raw material exporter countries like Turkey
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Economic stagnation in USA
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Foundation of EU with Treaty of Rome
1958 Crisis / Pre‐crisis ●
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Liberalization policies based on capital import was the main reason (Sermaye ithaline ayarlanmis serbestlesme programi) Trade Balace Deficit increased 1951 onwards Foreign Debt increased steadily, reached 256 million USD in 1958 CB reserves melted due to DP's increased expenditures, so can't pay foreign debt 1958: FX Crisis (kambiyo krizi)
1958 Crisis / Crisis ●
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Trade Balance Deficit continued to increase 1958: $55.3m – 1959: $266.7 Unemployment Famine Due to huge foreign debt, it was impossible to borrow more or import Many small- and medium-size businesses and 7 banks bankrupted Extremely high cost of living
1958 Crisis / After‐crisis ●
First stand-by agreement with IMF (1958)
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Devaluation: 320%
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International trade liberalization
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Foreign debt was postponed
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Increase in price of SEE products
1958 Crisis / After‐crisis ●
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Even though there was a huge devaluation of TL, trade balance deficit continued to increase Real wages decreased Impacts of crisis on social life were not pleasant Then, 27 May 1960: Coup d'Etat
Debt Crisis Until 1977 • Oil Shock 1973 • Populist policies – DÇM (Convertible Turkish Lira Deposit Scheme) – State led investment boom
• Developed countries‐ tight monetary policies • Developing countries – could not export – oppurtunity to find foreign loan decreased – cost of trade borrowing increased
• Result 1977: FX shortage, CA Deficit, DEBT crisis
1977‐1979 • Due to oil shock 1979, inflation increased • Radical changes of economic policies in the world – Free market approach – Deregulation – Privatization
• 2 stand‐by agreement with IMF‐ failure • High political tension • Lost working days due to strikes and lockouts
1980 • • • • • •
24 Ocak Kararları Neoliberal policies Inflation increased to 107% Growth rate decreased Unemployment increased CA deficit – Shortage of FX before 1980 lead to a supply problem and import boom after liberalization.
• Result: Effects of policies during 70’s are visible in economic indicators in 1980
Source: State Planing Organization
1994 Currency Crisis/ Pre Crisis • • • • •
Deterioration of macroeconomic fundamentals Capital account liberalization in 1989 Increase in trade deficit Overvaluation of the real exchange rate Growing fiscal imbalances following capital account liberalization • Extensive ST borrowing esp. from foreign investors • Weak economic background prior to crisis.
1994 Currency Crisis/ Pre Crisis • Gov‐t’s loose fiscal policy and increased public deficit. • Indepence in monetary policies, high interest rates • Excess liquidity, increase in price levels, in TL • CB increase overnight interest rates • Cost of borrowing for gov’t increased
1994 Currency Crisis/ Pre Crisis • Gov‐t’s inappropriate economic policy changes in 1993 • Gov‐t’s policy objective decrease ST interest rates • Cancel ST maturity auctions • Tax interest income • Reliance on CB’s resources for public deficit • Increased inflationist pressures rush to FX
1994 Currency Crisis/Crisis • • • •
Depreciation of TL against US dollar Decline in reserves of CB Bankruptcies Industrial prod. sharply, increased input costs • Overnight interest rates jumped to levels of 700% from stable pre‐crisis 70% levels
1994 Currency Crisis/After‐Crisis • Stabilization program on april 5, 1994 with IMF support • Gov’t did not follow program measures properly; structural problems • New populist economic policies • 1999 and 2001 IMF supported stab. programs
2000 Banking and Liquidity Crisis
Pre‐Crisis After the 1994 crisis High real gross national product (GNP) growth
Chronic inflation
The unemployment level never went below 6.5% for the decade preceding the crisis
exchange rate regime was a “dirty” float Turkish Lira was overvalued ( with the exception of 1986 – 1989 and 1994 – 1995 periods )
The foreign exchange reserves of the central bank to GNP ratio followed an upward sloping trend
“Currency substitution”
Combination of last two graps; “Turkish people apparently considered foreign currencies as safer than Turkish Lira.”
GOVERNMENT SIDE; “duty loss ” Coalition DSP‐MHP‐ANAP; Impossible Trinity (!)
Considering the lack of discipline in public finance e.i. increasing trend in the domestic debt to GNP ratio.
Banking Sector; •
The capital structure of the Turkish banking sector was very poor
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The asset quality was very poor
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Maturity mismatch
Crisis The letter of intent of December 9, 1999 by IMF 3 year stand‐by arrangement ‐ US$4.0 billion exchange rate‐based stabilization program supplemented by fiscal adjustment and structural reform pre‐announced exit strategy‐18 months “quasi‐currency board” beginning of November 1999, Moody’s changed the outlook of Turkey to positive
Expected return of investing in Turkey increased due to decrease in exchange rate risk
interest rate decreasecredits increseC and I increase growth of economy increase interest rate decrease delayed consumption increase consumption of traded goods increase increase in trade deficit
due to the increase in the imports
Delays in privatization and postponement of regulatory measures of the banking sector outflow in September Istanbul Stock Market Index lost approximately 30% in value from November to December 15
foreign banks began to shut credit lines to some of the Turkish banks in order not to take further risks need of short‐term funding started selling government securities, reducing the price of them further and raising the interest rates In November; disappointing inflation figures for October higher than expected trade deficit figures worsening relations with European Union the situation in Argentina
Banks relying on foreign funds, like Demirbank, started to bid up the market for liquidity Central bank started to provide liquidity for the troubled banks in order to avoid deepening the financial crisis but not enough funds On November 30, 2000, the Central Bank of Turkey announced that commercial banks will no longer be funded in the inter‐ bank market Intervention by the IMF on December 6 ‐ US$ 7.5 billion High interest rates prevailed in the first months of 2001
In February, a National Security Meeting ended up with a scandal Interest rates on government bonds 155% O/N 7500% USD/TRL rate jumped from 685,000 to 960,000
After‐crisis 22 February floating exchange Stand‐by agreement in May 2001 Independency of CB was increased Regulation in BDDK and TMSF
Conclusion • Severeness and compexity of crises increased after 1980 • Two major problems: inflation and unemployment
References • • •
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Yükseler Z., Türkiye Kriz Dönemlerinde Ekonomik Gelişmeler ve Ödemeler Dengesi Uyumu, TCMB 2009. Rodirik D., Premature Liberalization, Incomplete Stabilization, The Ozal Decade in Turkey, NBER Working Paper #3300, 1990. Kazgan G., Turkiye'deki Ekonomik Krizler (1929‐2001) Nedenleri ve Sonuclari Uzerine Karsilastirmali Bir Irdeleme, Istanbul Bilgi Üniversitesi, 2005. Alper E., The Turkish Liquidity Crisi of 2000, (2001), Russian and East European Finance and Trade, vol.37 no.6. Rodrik, D. (2009), “The Turkish Economy after the Crisis”, Turkish Economic Association Discussion Paper, 2009/9.
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